<PAGE>   1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-K/A
                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934.

       For the fiscal year ended December 31, 1998
                                 -----------------

                                       OR

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934.

                           Commission File No. 0-22373
                                               -------

                                  VAXCEL, INC.
                                  ------------
             (Exact name of Registrant as specified in its charter)

                  Delaware                                58-2027283 
      ---------------------------------     ------------------------------------
        (State or other jurisdiction        (I.R.S. Employer Identification No.)
      of incorporation or organization)

           154 Technology Parkway
           Norcross, Georgia 30092                          30092       
  ----------------------------------------                  -----
  (Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (770) 453-0195
                                                    --------------

                              ---------------------

Securities registered pursuant to Section l2(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value per share

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES  X  NO
                      ---   ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

On April 14, 1999, the aggregate market value of the Registrant's common stock
held by non-affiliates was approximately $86,000.

On April 14, 1999, there were 10,994,656 shares of the Registrant's common stock
outstanding, exclusive of treasury shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

<PAGE>   2

    THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
VAXCEL, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933,
AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF VAXCEL, INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL
AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING
STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED
EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.



                                     PART I


ITEM 1. BUSINESS

GENERAL
         Vaxcel, Inc., a Delaware corporation ("Vaxcel" or the "Company"), was
formed on January 6, 1993 as a wholly-owned subsidiary of CytRx Corporation
("CytRx"). In May 1997, Vaxcel completed a merger with Zynaxis, Inc.
("Zynaxis"), resulting in the issuance of an aggregate of 12.5% of its
outstanding (post-merger) shares of common stock to the former shareholders of
Zynaxis (see Note 3 to Financial Statements).

         Vaxcel has historically engaged in the development and
commercialization of vaccine adjuvants and delivery systems and a novel vaccine
for the treatment of cancer.  However, as discussed below, the Company's ability
to survive as a going concern is subject to a number of uncertainties.

CURRENT FINANCIAL CONDITION AND THE POTENTIAL IMPACT ON OPERATIONS

         At December 31, 1998, the Company had negligible cash and cash
equivalents and a working capital deficit of $304,000. Subsequent to year-end,
the Company has received payments related to the sale of certain technology,
however, the Company's current cash resources, together with the proceeds of
this transaction are not sufficient to fund its operations beyond the second
quarter of 1999. The Company has incurred losses from operations since its
inception, and there is substantial doubt about the Company's ability to survive
as a going concern.

         In May 1998, the Company's Board of Directors retained the investment
banking firm of Interstate/Johnson Lane Corporation to introduce Vaxcel and its
technology licenses to the trade with the purpose of concluding a strategic
transaction or transactions for the benefit of the Vaxcel stockholders. In order
to fund its operations and technologies, the Company will consider all available
options, including the possible sale of the Company to, or merger with, another
organization. In January 1999, the Company entered into an option agreement for
the sale of its PLG microencapsulation technology which option was exercised by
the third party in April 1999 (see "Product Development" below and Note 5 to
Financial Statements).

         The Company has severely reduced its operations, limiting its ability
to advance its technologies under development. For the Company to continue as a
going concern, it may need to obtain funds through arrangements that require it
to relinquish rights to certain or all of its technologies. The Company may be
required to totally cease operations and liquidate remaining assets, if any.
Should the Company determine that it is no longer in the best interest of its
stockholders to continue operations, the ability of the Company to fund an
orderly disposition of assets, pay off its then outstanding liabilities and
return any remaining cash to its shareholders will be limited by the amount of
working capital on hand.

                                                                               2
<PAGE>   3

PRODUCT DEVELOPMENT

         Vaxcel is not currently actively developing any of its technologies.

         Optivax is the tradename for a family of proprietary nonionic block
copolymers which augment or modify the immune response to vaccines when
administered primarily by injection. Optivax acts both as a delivery system by
targeting vaccines to cells of the immune system and as an adjuvant because of
its ability to augment the immune system's response to vaccines.

         Mucoadhesives are natural or synthetic polymers that bind to mucosal
tissues or the mucin that coats these tissues. Mucoadhesive polymers have been
favorably evaluated by others for oral delivery of drugs and Vaxcel believes
this technology may have application for vaccines.

         In March 1998, Vaxcel and University College London ("UCL") executed a
definitive license agreement whereby Vaxcel acquired worldwide, exclusive rights
to genetically engineered and mutated (beta)-Human Chorionic Gonadotropin
((beta)hCG) proteins for use in the treatment and/or prevention of cancer. UCL
retained the rights to these (beta)hCG proteins for therapeutic applications
other than cancer. Under the terms of this license agreement, Vaxcel paid UCL an
upfront license fee upon execution of this license agreement and will further
pay UCL a royalty on net sales of any cancer product that utilizes the (beta)hCG
proteins. Vaxcel also has the right to sublicense the (beta)hCG proteins,
subject to certain conditions and the payment to UCL of a fixed proportion of
the sublicense compensation received by Vaxcel. Vaxcel believes these proteins
can be combined with the Company's Optivax adjuvant technology to develop a next
generation (beta)hCG cancer vaccine.

         In January 1999, the Company entered into an agreement with Innovax
Corporation ("Innovax") giving Innovax the option to purchase the rights to
Vaxcel's PLG microencapsulation technology for an aggregate purchase price of
$600,000. Innovax paid a nonrefundable option fee of $200,000, with an
additional $400,000 due upon the exercise of the option. On April 1, 1999
Innovax exercised its option and the rights to such technology were assigned by
Vaxcel to Innovax.

         Vaxcel's business strategy has been to sublicense its technologies on a
vaccine-by-vaccine basis to companies engaged in vaccine development. See
"Corporate Collaborations". Amounts spent for research and development
activities for Vaxcel's adjuvant and delivery system technologies were $916,000,
$1,165,000 and $853,000 during the years ended December 31, 1998, 1997, and
1996, respectively.

         Corporate Collaborations.

        Corixa. In April 1996, Vaxcel signed a definitive license agreement with
    Corixa Corporation ("Corixa") for use of Vaxcel's Optivax in combination
    with vaccines being developed by Corixa. Corixa, a publicly-traded
    Seattle-based biotechnology company, is discovering and developing T-cell
    therapeutic vaccines for the treatment of certain infectious diseases and
    cancer.

        Under terms of the agreement, Corixa received worldwide, exclusive
    rights to use Optivax with a variety of cancer and infectious disease
    vaccines being developed by Corixa. Corixa also has the right to sublicense
    vaccines containing Optivax. Corixa or its sublicensees will be responsible
    for conducting all development, regulatory submissions and marketing
    activities for their vaccines combined with Optivax. In return, if vaccines
    are successfully developed, Vaxcel will receive milestone payments,
    royalties on sales of such vaccines, and payments under a supply agreement
    for having Optivax manufactured for Corixa or its sublicenses.

                                                                               3
                                                                               
<PAGE>   4
PATENTS AND PROPRIETARY TECHNOLOGY

         Vaxcel actively seeks patent protection for its technologies,
processes, and uses, and considers its patents and other intellectual property
to be critical to its business.

         Vaxcel has received a worldwide, exclusive license from CytRx for the
use of a series of certain copolymers as a vaccine adjuvant/delivery system. See
Item 13 - "Certain Relationships and Related Transactions." These patents and
patent applications contain claims directed to the use of copolymers as vaccine
adjuvants/delivery systems and the use of the copolymers in any vaccine
preparation.

         Vaxcel also has rights to pending United States patent applications and
foreign counterparts relating to the use of polymeric mucoadhesives for the oral
delivery of vaccines at mucosal surfaces and compositions and methods for
preparation of solid, orally administered dosage units for live viral vaccines.

         Patent applications on the genetically engineered and mutated (beta)hCG
proteins were submitted by UCL in 1995. The claims in these patent applications
are directed to both composition of matter and therapeutic uses of the
recombinant, mutated (beta)hCG proteins.

         Vaxcel also attempts to protect its proprietary products, processes and
other information by relying on trade secrets and non-disclosure agreements with
its current and former employees, consultants and certain other persons who have
access to such products, processes and information. Nevertheless, there can be
no assurance that these agreements will afford significant protection against
misappropriation or unauthorized disclosure of Vaxcel's trade secrets and
confidential information.

GOVERNMENT REGULATION

         The manufacture and sale of any product based on Vaxcel's vaccine
adjuvants and delivery systems or its (beta)hCG cancer proteins will be subject
to extensive regulation by United States and foreign governmental authorities.
The FDA has established guidelines and safety standards which apply to the
pre-clinical evaluation, clinical testing, manufacture and marketing of
pharmaceutical products. The process of obtaining FDA approval for a new
therapeutic or prophylactic product (drug and/or vaccine) generally takes
several years and involves the expenditure of substantial resources. The steps
required before such a product can be produced and marketed for human use in the
United States include preclinical studies in animal models, the filing of an
Investigational New Drug ("IND") application, human clinical trials and the
submission and approval of a Product License Application ("PLA"). The PLA
involves considerable data collection, verification and analysis, as well as the
preparation of summaries of the manufacturing and testing processes, preclinical
studies, and clinical trials. The FDA must approve the PLA before the drug may
be marketed. There can be no assurance that the Company will be able to obtain
the required FDA approvals for any of its products.

         The manufacturing facilities and processes for the Company's products,
whether manufactured directly by the Company or by a third party, will be
subject to rigorous regulation, including the need to comply with Federal Good
Manufacturing Practice regulations. The Company is also subject to regulation
under the Occupational Safety and Health Act, the Environmental Protection Act,
the Nuclear Energy and Radiation Control Act, the Toxic Substance Control Act
and the Resource Conservation and Recovery Act.

COMPETITION

         Many companies, including large pharmaceutical, chemical and
biotechnology firms with financial resources, research and development staffs,
and facilities that are substantially greater than those of the Company, are
engaged in the research and development of pharmaceutical products that could
compete with the products under development by the Company. The industry is
characterized by rapid technological advances and competitors may develop their
products more rapidly and/or such products may be more effective than those
under development by the Company or its licensees and corporate partners.




                                                                               4
<PAGE>   5

MANUFACTURING

         Vaxcel currently does not have the capabilities to manufacture any of
its vaccine delivery/adjuvant technologies or its (beta)hCG proteins and plans
to rely upon collaborators and/or contract manufacturers to produce both its
technologies and final vaccine products for preclinical, clinical, and
commercial purposes. Currently, Vaxcel is not actively developing its 
technologies or products and is not conducting any preclinical studies or 
clinical trials with respect to such technologies and products. Vaxcel is also 
not marketing or distributing any of such technologies or products on a 
commercial scale. If Vaxcel decides to further develop its technologies and 
products, there can be no assurance that third parties or collaborators would 
be willing or able to manufacture such technologies or products in accordance 
with GMP conditions and in quantities required by Vaxcel to satisfy its needs.

ENVIRONMENTAL PROTECTION

         During 1998, compliance with federal, state and local regulations
pertaining to environmental standards did not have a material effect upon the
capital expenditures or earnings of the Company.

EMPLOYEES

         During 1998, as part of its cash conservation measures, the Company
terminated the services of all of its research and development staff. The
Company currently employs only one individual, who serves in the capacity of
President & Chief Executive Officer on a part-time basis. The Company also
utilizes the services of two CytRx executives, pursuant to a services and
facilities agreement. See Item 13 - "Certain Relationships and Related
Transactions."

ITEM 2. PROPERTIES

         Vaxcel currently leases administrative space from CytRx pursuant to a
services and facilities agreement. Such space is adequate for Vaxcel's needs.
See Item 13 - "Certain Relationships and Related Transactions."

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol VXCL. The following table sets forth the high and low bid information
for the Common Stock for the periods indicated as reported by the OTC Bulletin
Board. Such prices represent bids between dealers without adjustment for retail
mark-ups, mark-downs, or commissions and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                                  High                       Low
                                                                 ------                    -------
<S>                                                              <C>                       <C>
COMMON STOCK:
     1999:
         January 1 to April 22                                    1/8                       1/16
     1998:
         Fourth Quarter                                           1/8                       1/16
         Third Quarter                                            5/8                       1/8
         Second Quarter                                           1 1/32                    15/32
         First Quarter                                            11/16                     1/2
     1997
         Fourth Quarter                                           1                         3/8
         Third Quarter                                            1 3/4                     5/8
         Second Quarter (from May 21)                             2 1/8                     1 1/4
</TABLE>

                                                                               5
<PAGE>   6


         On April 22, 1999, the closing bid quotation of the Common Stock as
reported on the OTC Bulletin Board was $1/16 and there were approximately 275
holders of record of the Company's Common Stock. The number of record holders
does not reflect the number of beneficial owners of the Company's Common Stock
for whom shares are held by Cede & Co., certain brokerage firms and other
institutions. The Company has not paid any dividends since its inception and
does not contemplate payment of dividends in the foreseeable future.

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                1998(a)           1997(b)           1996              1995               1994
                                             -----------------------------------------------------------------------------------
<S>                                          <C>               <C>               <C>               <C>               <C>
Statement of Operations Data:
Total revenues                               $   254,471       $   288,504       $   135,563       $   178,707       $   508,886
Net loss                                      (4,993,289)       (2,599,298)       (1,124,183)       (1,378,805)         (599,843)
Basic and diluted loss per common share             (.45)            (0.26)            (0.14)            (0.17)            (0.09)

Balance Sheet Data:
Total assets                                 $   976,287       $ 5,458,210       $   377,992       $   701,868       $ 1,043,575
Total stockholders' equity                       358,161         5,291,450           159,986           584,169           962,974
</TABLE>

(a)      Includes a $3,212,000 impairment loss related to acquired developed
         technology and goodwill.
(b)      Includes a $951,000 charge for acquired incomplete research and
         development.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Liquidity and Capital Resources
         At December 31, 1998, the Company had cash and cash equivalents of
$2,900 and net assets of $358,000, as compared to $691,000 and $5,291,000,
respectively, at December 31, 1997. At December 31, 1998 the Company had a
working capital deficit of $304,000.

         The Company is critically short of cash to fund its operations. The
Company has incurred losses from operations since its inception, and there is
substantial doubt about the Company's ability to survive as a going concern. As
discussed below, the Company has received additional payments subsequent to
year-end pursuant to the sale of certain technology. However, the Company's
current cash resources, together with the proceeds of these transactions are not
sufficient to fund its operations beyond the second quarter of 1999.

         The Company has severely reduced its operations, limiting its ability
to advance its technologies under development. For the Company to continue as a
going concern, it may need to obtain funds through arrangements that require it
to relinquish rights to certain or all of its technologies. The Company may be
required to totally cease operations and liquidate remaining assets, if any.
Should the Company determine that it is no longer in the best interest of its
stockholders to continue operations, the ability of the Company to fund an
orderly disposition of assets, pay off its then outstanding liabilities and
return any remaining cash to its shareholders will be limited by the amount of
working capital on hand.

         During 1998, the Company's Board of Directors retained an investment
banking firm to introduce Vaxcel and its technology licenses to the trade with
the purpose of concluding strategic transactions for the benefit of the Vaxcel
stockholders. Based on the results of the investment banking firm's efforts and
management's reevaluation of Vaxcel's business strategy, in the fourth quarter
of 1998 the Company adopted a plan to dispose of its primary research and
development activities and intends to complete the plan during 1999.

        
                                                                               6
<PAGE>   7
         In January 1999, the Company entered into an agreement with a third
party giving the third party the option to purchase the rights to certain of its
technologies for an aggregate purchase price of $600,000. The third party paid a
nonrefundable option fee of $200,000, with an additional $400,000 due upon the
exercise of the option. On April 1, 1999 the third party exercised its option
and the rights to such technology were assigned to the third party. See Note 5
to Financial Statements.

         In April 1998, December 1998 and January 1999, Vaxcel borrowed a
cumulative total of $181,000 from CytRx pursuant to three convertible note
agreements, $25,000 of which was repaid in February 1999 and the remainder was
repaid in April 1999. (see Note 9 to Financial Statements). Such notes bore
interest at 9% per annum and were convertible, at CytRx's discretion, into
shares of Vaxcel common stock.

         During 1997 and 1998, the Company has received federal government
funding for certain research and development activities via several Small
Business Innovative Research (SBIR) grants, which has offset a significant
portion of the Company's research and development expenditures. Amounts received
totaled $97,000 and $167,000 in 1997 and 1998, respectively.

         At December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes of approximately $11.8 million, which will expire in
2008 through 2018, if not utilized. The Company also has research and
development credits available to reduce income taxes, if any, of approximately
$111,000 which will expire in 2008 through 2011, if not utilized. Based on an
assessment of all available evidence including, but not limited to, the
Company's limited operating history and lack of profitability, uncertainties of
the commercial viability of the Company's technology, the impact of government
regulation and healthcare reform initiatives, and other risks normally
associated with biotechnology companies, the Company has concluded that it is
more likely than not that these net operating loss carryforwards and credits
will not be realized and, as a result, a 100% deferred tax valuation allowance
has been recorded against these assets. Such valuation allowance had no impact
on reported net losses. See Note 8 to Financial Statements.

Results of Operations
         The Company recorded net losses of $4,993,000 for the year ended
December 31, 1998 as compared to $2,599,000 for 1997 and $1,124,000 for 1996.
The 1998 net loss included a charge of $3,213,000 related to the impairment of
certain intangible assets (see discussion below). The 1997 net loss included a
charge of $951,000 for acquired incomplete research and development incurred
during 1997 as a result of the Company's merger with Zynaxis (see Note 4 to
Financial Statements).

         During 1998, 1997 and 1996, Vaxcel recorded collaborative and grant
revenues of $167,000, $243,000 and $78,000, respectively. These amounts relate
to primarily to research funding pursuant to SBIR grants to Vaxcel from the
National Institutes of Health and vary according to the number of grants and
scope of work being conducted during each period. As of December 31, 1998,
Vaxcel did not have any active grants. The costs associated with these
arrangements approximate the revenues recorded and are reflected in research and
development expense.

         Research and development expenditures for year ended December 31, 1998
were $916,000, as compared to $1,165,000 for 1997 and $853,000 for 1996. The
acquisition of in-process research and development from Zynaxis did not
significantly impact the Company's ongoing research and development expenditures
during 1997 or 1998, however the Company anticipates significant future
expenditures will be required to continue development of these technologies into
commercially viable products. Such expenditures have been and will be limited by
the Company's available capital resources. The increase in research and
development expense from 1996 to 1997 is primarily due to higher expenses
associated with the Company's collaborative and grant arrangements, which were
offset by collaborative and grant revenues. Other fluctuations in expenditures
from year to year are due to the timing and nature of external studies being
performed. During 1997 and 1998, in order to conserve cash resources, the
Company took steps to reduce its research and development expenditures which
were not supported by government funding, including personnel reductions.

         General and administrative expenses for the year ended December 31,
1998 were $1,119,000, as compared to $772,000 during 1997 and $407,000 during
1996. The overall increase during the three year period is primarily due to
non-transaction expenses associated with the Company's acquisition of Zynaxis in
May 1997 and activities for administration of the combined companies.
Furthermore, during 1998 the Company incurred additional expenses related to (a)
its efforts to secure a strategic transaction, (b) the in-license of certain
technology from the University College London, and (c) certain minimum royalty
obligations to Southern Research Institute. Management believes that inflation
had no material impact on the Company's operations during the three year period
ended December 31, 1998.

                                                                               7
<PAGE>   8
         In its efforts to raise additional capital, the Company has been
soliciting bids for the sublicense or purchase of the Company's acquired
developed technology, either together with or separately from the Company's
other technologies. In connection with this effort, the Company performed an
evaluation to determine, in accordance with Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of ("Statement 121"), whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of the acquired developed technology would be less than its
aggregate carrying amount and an allocation of goodwill resulting from the
Zynaxis merger. Statement 121 requires that when a group of assets being tested
for impairment was acquired as part of a business combination accounted for
using the purchase method of accounting, any goodwill that arose as part of the
transaction must be included as part of the asset grouping. As a result of the
evaluation, management determined that the estimated future cash flows expected
to be generated by the acquired developed technology would be less than its
carrying amount and allocated goodwill, and therefore the asset is impaired as
defined by Statement 121. Consequently, the original cost basis of the acquired
developed technology and allocated goodwill were reduced to reflect the fair
market value at the date the decision was made, resulting in a $3,213,000
impairment loss. In determining the fair market value of the asset, the Company
considered the recent transaction as described in Note 5 to Financial
Statements.

         Interest expense incurred during 1998 relates to the convertible notes
issued to CytRx and includes a $60,000 charge for the beneficial conversion
feature of a portion of the notes.

Year 2000 Issue
         The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.

State of Readiness
         Substantially all of the Company's business systems and services are
provided by CytRx Corporation. CytRx has developed and is implementing a
comprehensive plan (the "Year 2000 Plan") to become Year 2000 ready by the
middle of the fourth quarter 1999. The Year 2000 Plan addresses the following
systems for both CytRx and Vaxcel (collectively, the "Systems"):

         -        the Company's business-critical information technology and
                  operating systems ("Critical IT Systems") which are comprised
                  substantially of commercial off-the-shelf software and other
                  third party software and hardware relating primarily to
                  financial operations and reporting, including accounts
                  payable,

         -        the Company's non-critical information technology and
                  operating systems ("Non-Critical IT Systems") which also are
                  substantially comprised of commercial off-the-shelf software
                  and other third party software and hardware relating to, among
                  others, spreadsheet, word processing, and supporting and
                  related operating systems;

         -        the systems of the Company's major vendors and other material
                  service providers ("Third Party Systems"); and

         -        the Company's non-information technology systems, including
                  embedded technology ("Non-IT Systems") relating to, among
                  others, security systems and HVAC.

         The Year 2000 Plan consists of four phases: (i) awareness, (ii)
assessment, (iii) remediation, and (iv) creation of contingency plans in the
event of year 2000 failures. CytRx has completed the awareness and assessment
phases of its Year 2000 Plan for all of its Systems, and is well under way
toward completing the remediation phase. As part of the assessment phase, CytRx
has polled substantially all of the third parties who provide material services
to Vaxcel regarding each third party's Year 2000 compliance plan and state of
readiness. CytRx has received responses regarding Year 2000 compliance from most
of such third parties, all of whom have assured the Company that their hardware
and/or software is or will be Year 2000 compliant. CytRx is actively seeking
responses from the remainder of such third parties.

                                                                               8
<PAGE>   9
Costs
         To date, the Company has not incurred significant costs in connection
with the implementation of its Year 2000 Plan. The Company expects that future
costs, which may include, among other things, the engagement of outside
consultants, upgrades or replacements of hardware and software, and
implementation of viable contingency plans, will be borne by CytRx.

Risks and Contingency Plans
    The failure to remediate a material Year 2000 problem or develop and
implement a viable contingency plan could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's business, financial
condition and results of operations. Due to the general uncertainty inherent in
the Year 2000 issue, the Company is currently unable to determine the most
reasonably likely worst case Year 2000 scenarios or whether the Year 2000 issue
will have a material impact on the Company. The Company is creating contingency
plans intended to address perceived risks.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

N/A

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




                                                                              9
<PAGE>   10



BALANCE SHEETS
--------------
Vaxcel, Inc.

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                      -------------------------------
                                                                                          1998               1997
                                                                                      ------------       ------------
<S>                                                                                   <C>                <C>
ASSETS
Current assets:
     Cash and cash equivalents                                                        $      2,900       $    690,636
     Accounts receivable                                                                     5,808            141,898
     Note receivable                                                                       300,000                  -
     Other                                                                                   5,308                500
                                                                                      ------------       ------------
         Total current assets                                                              314,016            833,034

Property and equipment:
     Equipment and furnishings                                                             145,264            299,172
     Accumulated depreciation                                                             (138,667)          (225,017)
                                                                                      ------------       ------------
         Net property and equipment                                                          6,597             74,155

Other assets:
     Notes receivable                                                                            -            400,000
     Acquired developed technology and other intangibles, net                              600,000          4,095,347
     Other                                                                                  55,674             55,674
                                                                                      ------------       ------------
         Total other assets                                                                655,674          4,551,021
                                                                                      ------------       ------------

Total assets                                                                          $    976,287       $  5,458,210
                                                                                      ============       ============


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                                 $    221,885       $     20,166
     Accrued liabilities                                                                   214,483             72,880
     Amounts due to affiliates                                                             181,758             73,714
                                                                                      ------------       ------------
         Total current liabilities                                                         618,126            166,760

Commitments

Stockholders' equity:
     Preferred stock ($.001 par value, 2,000,000 shares
         authorized; no shares issued and outstanding)                                          --                 --
     Common stock ($.001 par value, 30,000,000 shares authorized; 10,994,656 and
         11,001,070 shares issued and outstanding at December 31, 1998 and 1997,
         respectively)                                                                      10,995             11,001
     Additional paid-in capital                                                         12,485,767         12,425,761
     Accumulated deficit                                                               (12,138,601)        (7,145,312)
                                                                                      ------------       ------------
         Total stockholders' equity                                                        358,161          5,291,450
                                                                                      ------------       ------------

Total liabilities and stockholders' equity                                            $    976,287       $  5,458,210
                                                                                      ============       ============
</TABLE>



                             See accompanying notes.




                                                                              10
<PAGE>   11




STATEMENTS OF OPERATIONS
------------------------
Vaxcel, Inc.

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                ------------------------------------------------
                                                                    1998              1997               1996
                                                                ------------       -----------       -----------
<S>                                                             <C>                <C>               <C>
Revenues:
     Collaborative and grant revenue                            $    166,882       $   242,961       $    78,435
     License fees                                                     75,000                 -            50,000
     Investment income                                                12,589            45,543             7,128
                                                                ------------       -----------       -----------
                                                                     254,471           288,504           135,563

Expenses:
     Research and development
         Transactions with affiliates                                 22,261           291,806            73,163
         Other                                                       894,105           872,959           779,686
     Acquired incomplete research and development                          -           951,017                 -
     Selling, general and administrative
         Transactions with affiliates                                150,000            90,000            70,263
         Other                                                       901,993           680,599           336,634
     Impairment loss                                               3,212,615                 -                 -
     Interest expense                                                 66,786             1,421                 -
                                                                ------------       -----------       -----------
                                                                   5,247,760         2,887,802         1,259,746
                                                                ------------       -----------       -----------

     Net loss                                                   $ (4,993,289)      $(2,599,298)      $(1,124,183)
                                                                ============       ===========       ===========

     Basic and diluted loss per common share                    $      (0.45)      $     (0.26)      $     (0.14)
                                                                ============       ===========       ===========

     Basic and diluted weighted average shares outstanding        10,996,905         9,939,680         8,104,782
</TABLE>



                             See accompanying notes.




                                                                              11
<PAGE>   12




STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------
Vaxcel, Inc.

<TABLE>
<CAPTION>
                                                        Common Stock            
                                                ------------------------------     Additional
                                                    Shares                           Paid-in       Accumulated
                                                  Outstanding           Amount       Capital         Deficit          Total
                                                -------------------------------------------------------------------------------
<S>                                             <C>                   <C>          <C>           <C>               <C>
Balance at December 31, 1995                          8,000,000       $   8,000    $ 3,998,000   $ (3,421,831)     $   584,169
    Issuance of common stock to CytRx                   250,004             250        374,756                         375,006
    Capital contribution by CytRx                                                      324,994                         324,994
    Net loss                                                  -               -              -     (1,124,183)      (1,124,183)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1996                          8,250,004           8,250      4,697,750     (4,546,014)         159,986
    Issuance of common stock                              5,333               5          8,000                           8,005
    Pre-merger capital contribution by CytRx                                           163,396                         163,396
    Issuance of common stock in connection
       with merger, net of transaction costs          2,745,733           2,746      7,556,615                       7,559,361
    Net loss                                                                                       (2,599,298)      (2,599,298)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1997                         11,001,070          11,001     12,425,761     (7,145,312)       5,291,450
    Retirement of common shares                          (6,414)             (6)             6                               -
    Beneficial conversion feature of
       convertible notes                                                                60,000                          60,000
    Net loss                                                                                       (4,993,289)      (4,993,289)
                                                -------------------------------------------------------------------------------
Balance at December 31, 1998                         10,994,656       $  10,995   $ 12,485,767  $ (12,138,601)     $   358,161
                                                     ==========       =========   ============  =============      ===========
</TABLE>



                             See accompanying notes.




                                                                              12
<PAGE>   13




STATEMENTS OF CASH FLOWS
------------------------
Vaxcel, Inc.

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                -----------------------------------------------
                                                                                   1998               1997              1996
                                                                                -----------       -----------       -----------
<S>                                                                             <C>               <C>               <C>
Cash flows from operating activities:
    Net loss                                                                    $(4,993,289)      $(2,599,298)      $(1,124,183)
    Adjustments to reconcile net loss to
      net cash used in operating activities:
      Loss on disposal of fixed assets                                               44,755                 -                 -
      Depreciation                                                                   10,902            55,392            51,600
      Amortization                                                                  282,732           145,644                 -
      Impairment loss                                                             3,212,615                 -                 -
      Charge for beneficial conversion feature of convertible notes                  60,000
      Charge for acquired incomplete research and development                             -           951,017                 -
      Changes in assets and liabilities:
        Receivables                                                                 136,090           201,384           (44,184)
        Other assets                                                                 95,192           112,939          (111,674)
        Accounts payable                                                            201,719           (57,873)          (29,347)
        Amounts due to affiliates                                                   (48,754)           43,287            16,010
        Other liabilities                                                           141,603          (176,759)          113,644
                                                                                -----------       -----------       -----------
    Total adjustments                                                             4,136,854         1,275,031            (3,951)
                                                                                -----------       -----------       -----------

    Net cash used in operating activities                                          (856,435)       (1,324,267)       (1,128,134)


Cash flows from investing activities:
    Capital expenditures/retirements, net                                            11,901            (3,371)           (2,907)
                                                                                -----------       -----------       -----------

    Net cash provided by (used in) investing activities                              11,901            (3,371)           (2,907)


Cash flows from financing activities:
    Proceeds from issuance of convertible notes                                     156,798                 -                 -
    Equity contributions by CytRx                                                         -           163,396           324,994
    Net proceeds from issuance of common stock to CytRx in connection with
      acquisition of Zynaxis, Inc. 
                                                                                          -         1,762,392                 -
    Proceeds from sale of common stock                                                    -             8,005           375,006
                                                                                -----------       -----------       -----------

    Net cash provided by financing activities                                       156,798         1,933,793           700,000
                                                                                -----------       -----------       -----------


Net (decrease) increase in cash and cash equivalents                               (687,736)          606,155          (431,041)

Cash and cash equivalents at beginning of period                                    690,636            84,481           515,522
                                                                                -----------       -----------       -----------

Cash and cash equivalents at end of period                                      $     2,900       $   690,636       $    84,481
                                                                                ===========       ===========       ===========
</TABLE>


                             See accompanying notes.




                                                                              13
<PAGE>   14



Notes to Financial Statements
-----------------------------
Vaxcel, Inc.

1.       DESCRIPTION OF BUSINESS AND SIGNIFICANT UNCERTAINTIES

         Vaxcel, Inc. ("Vaxcel" or the "Company") was formed on January 6, 1993
as a wholly-owned subsidiary of CytRx Corporation ("CytRx"). In May 1997, Vaxcel
completed a merger with Zynaxis, Inc. ("Zynaxis"), resulting in the issuance of
an aggregate of 12.5% of its outstanding (post-merger) shares of common stock to
the former shareholders of Zynaxis (see Note 3). Vaxcel is engaged in the
development and commercialization of vaccine adjuvants and delivery systems and
a novel vaccine for the treatment of cancer. Vaxcel's business strategy is to
sublicense these adjuvant and delivery system technologies on a
vaccine-by-vaccine basis to companies engaged in vaccine development. However,
as discussed below, there is substantial doubt about the Company's ability to
survive as a going concern.

         At December 31, 1998, the Company had cash and cash equivalents of
$3,000 and a working capital deficit of $304,000. The Company has obtained loans
from CytRx pursuant to certain convertible notes (see Note 9) and has received
additional payments subsequent to year-end pursuant to a certain option
agreement (see Note 5). However, the Company's current cash resources, together
with the proceeds of these transactions are not sufficient to fund its
operations beyond the second quarter of 1999. The Company has severely reduced
its operations, limiting its ability to advance its technologies under
development. For the Company to continue as a going concern, it may need to
obtain funds through arrangements that require it to relinquish rights to
certain or all of its technologies. The Company may be required to totally cease
operations and liquidate remaining assets, if any. Should the Company determine
that it is no longer in the best interest of its stockholders to continue
operations, the ability of the Company to fund an orderly disposition of assets,
pay off its then outstanding liabilities and return any remaining cash to its
stockholders will be limited by the amount of working capital on hand.

         During 1998, the Company's Board of Directors retained an investment
banking firm to introduce Vaxcel and its technology licenses to the trade with
the purpose of concluding strategic transactions for the benefit of the Vaxcel
stockholders. Based on the results of the investment banking firm's efforts and
management's reevaluation of Vaxcel's business strategy, in the fourth quarter
of 1998 the Company adopted a plan to dispose of its primary research and
development activities and intends to complete the plan during 1999.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Cash Equivalents - The Company considers all highly liquid debt
instruments with an original maturity of 90 days or less to be cash equivalents.
Cash equivalents consist primarily of commercial paper and amounts invested in
money market accounts.

         Short-term Investments - Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. At December 31, 1997, the Company classified corporate debt securities of
$496,000 as held-to-maturity securities and included such investments in cash
and cash equivalents as their original maturity dates were less than 90 days. At
December 31, 1998, the Company did not hold any debt securities.

         Property and Equipment - Property and equipment are stated at cost and
depreciated using the straight-line method based on the estimated useful lives
(generally five years) of the related assets.

         Acquired Developed Technology and Other Intangibles -- Acquired
developed technology and other intangible assets, primarily goodwill (See Note
3), are amortized over their estimated useful lives (fifteen years) on a
straight-line basis. Management periodically evaluates the realizability of
recorded acquired developed technology and other intangible assets to determine
whether their carrying values have been impaired. In accordance with Financial
Accounting Standards Board ("FASB") Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the
Company records impairment losses on long-lived assets (including goodwill) used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. Any impairment loss
is measured by 

                                                                              14
<PAGE>   15

comparing the fair value of the asset to its carrying amount. As more fully
discussed in Note 4, management has evaluated these assets at December 31, 1998
and has recorded a provision for impairment of such assets.

         Patents and Patent Application Costs - Although the Company believes
that its patents and underlying technology have continuing value, the amount of
future benefits to be derived therefrom is uncertain. Patent costs are therefore
expensed rather than capitalized.

         Fair Value of Financial Instruments - The carrying amounts reported in
the balance sheet for cash and cash equivalents, accounts and notes receivable,
accounts payable and convertible notes approximate their fair values.

         Basic and Diluted Loss per Common Share - Basic and diluted loss per
share are computed based on the weighted average number of common shares
outstanding. Common share equivalents are excluded from the computation of
diluted loss per share since the effect would be antidilutive.

         Shares Reserved for Future Issuance - The Company has reserved
approximately 1,500,000 of its authorized but unissued shares of common stock
for future issuance pursuant to stock options and warrants.

         Revenue Recognition - Revenues from collaborative research arrangements
and grants are generally recorded as the related costs are incurred. The costs
incurred under such arrangements approximated the revenues reported in the
accompanying statements of operations. License fees reported in the accompanying
statements of operations consist entirely of nonrefundable fees received upon
the signing of certain technology license and option agreements. These fees were
recognized as income when they were received. Such agreements generally contain
provisions for additional fees upon the achievement of certain development
milestones by the licensee and upon approval of the related products, followed
by a royalty based upon net sales. Such fees, if any, will be recognized as
income when they become receivable under the terms of the related contracts.

         Stock-Based Compensation - The Company grants stock options for a fixed
number of shares to key employees, directors and consultants with an exercise
price equal to the fair market value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and, accordingly,
recognizes no compensation expense for the stock option grants for which the
terms are fixed. For stock option grants which vest based on certain corporate
performance criteria, compensation expense is recognized to the extent that the
quoted market price per share exceeds the exercise price on the date such
criteria are achieved or are probable.

         In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-based Compensation ("Statement 123"),
which provides an alternative to APB 25 in accounting for stock-based
compensation issued to employees. However, the Company has continued to account
for stock-based compensation in accordance with APB 25.

         Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash equivalents. The Company maintains cash equivalents in large
well-capitalized financial institutions, and the Company's investment policy
disallows investment in any debt securities rated less than "investment-grade"
by national ratings services.

         Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

3.       ACQUISITION OF ZYNAXIS, INC.

         In December 1996 CytRx, Vaxcel and Zynaxis signed an agreement whereby
Zynaxis would be merged with a wholly-owned subsidiary of Vaxcel. At that time
Zynaxis was a publicly-held biotechnology company engaged in the development of
certain vaccine technologies. The transaction was approved by the Zynaxis
stockholders at a meeting held on May 21, 1997 and was consummated as of that
date.

                                                                              15
<PAGE>   16

         Under the terms of the agreement all of the outstanding shares of
Zynaxis were converted into shares of Vaxcel based upon certain exchange ratios
defined in the agreement, resulting in the issuance of an aggregate of 1.4
million (12.5%) of the outstanding (post-merger) shares of Vaxcel common stock
(at $2.91 per share) to former Zynaxis stockholders at the date of closing. The
merger was treated as a purchase by Vaxcel and constituted a tax-free
reorganization for Zynaxis stockholders. The results of operations of Zynaxis
are included in the Statement of Operations since May 21, 1997.

         Pursuant to the agreement, CytRx was to provide up to $2 million to
Zynaxis under a secured credit facility during the period prior to closing of
the merger, at which time the outstanding principal and interest was to be
contributed to the capital of Vaxcel, together with additional equity in the
amount of $4 million less the outstanding principal and interest of the secured
note. At the time of closing the outstanding principal and interest of the
secured note to Zynaxis was approximately $1.7 million, resulting in a net cash
infusion from CytRx to Vaxcel of approximately $2.3 million. In addition, at the
date of closing, Vaxcel issued to CytRx a one-year warrant entitling CytRx to
purchase a number of shares of Vaxcel common stock equal to the amount of
capital which may be necessary for Vaxcel to satisfy requirements for inclusion
in the Nasdaq SmallCap Market, divided by one-half of the $2.91 per share
transaction price at the date of closing. The warrant expired unexercised.

         In accordance with the provisions of APB Nos. 16 and 17, all
identifiable assets acquired, including identified intangible assets and
liabilities assumed, were assigned a portion of the purchase price based on
their respective fair values. The fair values of the acquired developed
technology and incomplete research and development were determined based on an
independent appraisal. A summary of the allocation of the purchase price is as
follows (in thousands):

<TABLE>
<S>                                                    <C>
    Net tangible assets, less outstanding liabilities      $  (830)
    Acquired developed technology                            3,600
    Goodwill                                                   641
    Acquired incomplete research and development               951
                                                           -------
                                                           $ 4,362
                                                           =======
</TABLE>

4.       IMPAIRMENT LOSS

         In its efforts to raise additional capital, the Company has been
soliciting bids for the sublicense or purchase of the Company's acquired
developed technology, either together with or separately from the Company's
other technologies. During the fourth quarter, the results of an investment
firm's efforts to dispose of Vaxcel's technologies indicated to management that
the acquired developed technology might be impaired. As a result of this
indication, the Company performed an evaluation to determine, in accordance with
Statement 121, whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of the
acquired developed technology would be less than its aggregate carrying amount
and an allocation of goodwill resulting from the Zynaxis merger. Statement 121
requires that when a group of assets being tested for impairment was acquired as
part of a business combination accounted for using the purchase method of
accounting, any goodwill that arose as part of the transaction must be included
as part of the asset grouping. As a result of the evaluation, management
determined that the estimated future cash flows expected to be generated by the
acquired developed technology would be less than its carrying amount and
allocated goodwill, and therefore the asset is impaired as defined by Statement
121. Consequently, the original cost basis of the acquired developed technology
and allocated goodwill were reduced to reflect the fair market value at the date
the decision was made, resulting in a $3,213,000 impairment loss. In determining
the fair market value of the asset, the Company considered the transaction
described in Note 5, among other factors.

5.       POTENTIAL SALE OF TECHNOLOGY

         In January 1999, the Company entered into an agreement with a third
party giving the third party the option to purchase the rights to certain of its
technologies for an aggregate purchase price of $600,000. The third party paid a
nonrefundable option fee of $200,000, with an additional $400,000 due upon the
exercise of the option. The initial option period expires on March 22, 1999,
subject to extension upon the payment of additional fees by the third party.


                                                                              16
<PAGE>   17

6.       COMMITMENTS

         Rental expense under operating leases during the years ended December
31, 1998, 1997 and 1996 approximated $96,000, $61,000, and $56,000,
respectively. Minimum annual future obligations for operating leases are
approximately $7,500, $4,100 and $2,400 for 1999, 2000 and 2001, respectively.

         At December 31, 1998, pursuant to a license agreement for certain of
its technologies, the Company is subject to minimum annual payments of $190,000,
$120,000 and $140,000 during the years 1999, 2000 and 2001. In the years 2002
and beyond, the annual minimum payments increase by $10,000 per year, until the
expiration of the applicable patents.

7.       STOCK OPTIONS AND WARRANTS

         The Company has stock option plans pursuant to which key employees,
directors and consultants of the Company are eligible to receive incentive
and/or non-qualified options to purchase shares of the Company's common stock.
The options granted under the Plan have lives of ten years from the dates of
grant and generally become exercisable over a three year period from the dates
of grant, with the exception of certain options granted to the Company's Chief
Executive Officer and its Vice President of Research and Development, which are
subject to vesting criteria based upon corporate performance objectives.
Exercise prices are set at the fair market values of the common stock on the
dates of grant. No compensation expense was recorded in the three years ended
December 31, 1998.

         A summary of the Company's stock option activity, and related
information for the three years ended December 31, 1998 is as follows:

<TABLE>
<CAPTION>
                                                      Options                    Weighted Average Exercise Price
                                     ----------------------------------------    -------------------------------
                                        1998            1997           1996         1998       1997       1996
                                        ----            ----           ----         ----       ----       ----
<S>                                  <C>              <C>            <C>            <C>        <C>        <C>
Outstanding - beginning of year         847,000        794,453        735,000       $1.63      $1.50      $1.50
Granted                                 510,000         63,000         73,620         .63       3.18       1.50
Exercised                                     -         (5,333)             -           -       1.50          -
Forfeited                              (281,500)        (5,120)       (14,167)       1.73       1.50       1.50
                                     ----------       --------       --------       
Outstanding - end of year             1,075,500        847,000        794,453       $1.12      $1.63      $1.50
                                     ==========       ========       ========       

Exercisable at end of year              160,661        293,663        184,332       $1.68      $1.57      $1.50

Weighted average fair value of
options granted during the year      $      .42       $   1.82       $   0.83
</TABLE>

         The exercise prices for options outstanding as of December 31, 1998
ranged from $.63 to $3.25. The weighted average remaining contractual life of
those options is 6.2 years.

         The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options.

         Pro forma information regarding net loss and loss per share is required
by Statement 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions: weighted-average risk-free
interest rates of 5.83% for 1998, 6.53% for 1997 and 6.34% for 1996; dividend
yields of 0.0%; volatility factors of the expected market price of the Company's
common stock of .563 for 1998, .585 for 1997 and .378 for 1996; and a weighted
average expected life of the option of 8 years.

         The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input 

                                                                              17
<PAGE>   18

assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

         For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
                                                        1998             1997             1996
                                                       ----              ----             ----
<S>                                                <C>               <C>              <C>
Pro forma net loss                                 ($5,073,748)      ($2,692,650)     ($1,182,382)
Pro forma net loss per share (basic and diluted)      ($.46)            ($.27)           ($.15)
</TABLE>

8.       INCOME TAXES

         The Company has not incurred or paid income taxes since its inception.
For income tax purposes, as of December 31, 1998 the Company has an aggregate of
approximately $11,810,000 of net operating losses available to offset against
future taxable income, subject to certain limitations. Included in this amount
is $3,360,000 of net operating losses generated by Zynaxis prior to the merger.
See discussion below. Such losses expire in 2008 through 2018. The Company also
has an aggregate of approximately $111,000 of research and development credits
available for offset against future income taxes which expire in 2008 through
2012.

         Deferred income taxes reflect the net effect of temporary differences
between the financial reporting carrying amounts of assets and liabilities and
income tax carrying amounts of assets and liabilities. The components of the
Company's deferred tax assets and liabilities are as follows:


<TABLE>
<CAPTION>
                                                                        December 31,
                                                                -----------------------------
                                                                   1998               1997
                                                                -----------       -----------
          <S>                                                   <C>               <C>
          Deferred tax assets:
               Net operating loss carryforward                  $ 4,488,000       $ 3,566,000
               Tax credit carryforward                              111,000            77,000
               Other                                              1,175,000         1,179,000
                                                                -----------       -----------
          Total deferred tax assets                               5,774,000         4,822,000
          Deferred tax liabilities:
               Acquired  developed  technology  and  other
                 intangibles                                       (228,000)       (1,556,000)
               Depreciation                                               -           (16,000)
                                                                -----------       -----------
          Total deferred tax liabilities                           (228,000)       (1,572,000)
                                                                -----------       -----------
          Net deferred tax assets                                 5,546,000         3,250,000
          Valuation allowance                                    (5,546,000)       (3,250,000)
                                                                -----------       -----------
                                                                $         -       $         -
                                                                ===========       ===========
</TABLE>

         Based on assessments of all available evidence as of these dates,
management has concluded that the respective deferred income tax assets should
be reduced by valuation allowances equal to the amounts of the net deferred
income tax assets.

         The total amount of net operating loss carryforwards generated by
Zynaxis prior to the merger was $31,000,000. The use of pre-acquisition
operating loss carryforwards is subject to limitations imposed by the Internal
Revenue Code. The Company anticipates that these limitations will affect
utilization of the carryforwards prior to expiration. Therefore, for financial
reporting purposes the Company has recorded a deferred tax asset of $1,277,000,
related only to $3,360,000 of net operating losses not anticipated to be
affected by these limitations. A corresponding valuation allowance of $1,277,000
has been recorded. When realized, the tax benefit of these loss carryforwards
will be applied to reduce acquired developed technology and other intangibles
related to the acquisition of Zynaxis.

                                                                              18
<PAGE>   19

9.       RELATED PARTY TRANSACTIONS

LICENSE AGREEMENT

         At inception, the Company licensed from CytRx exclusive rights to
certain biologically-active copolymers used in Vaxcel's novel vaccine
formulations. Royalties paid to CytRx pursuant to this agreement amounted to
$7,500 during the year ended December 31, 1996. No royalties were paid to CytRx
during 1997 or 1998.

SUPPLY AGREEMENT
         During the term of the related license agreement, CytRx agreed to
supply the Company with certain copolymers required in the manufacture and
development of the vaccine delivery formulation. Amounts paid to CytRx for
production of copolymers were $5,000, $80,000 and $11,000 during the years ended
December 31, 1998, 1997 and 1996, respectively.

SERVICES AND FACILITIES AGREEMENTS
         The Company entered into service and facilities agreements with CytRx
and a wholly-owned subsidiary of CytRx, whereby CytRx and its subsidiary have
provided the Company with office and laboratory space, certain administrative
and laboratory services and the services of certain CytRx executives. Pursuant
to these agreements, the Company expensed a total of $96,000, $138,000 and
$121,000 during the years ended December 31, 1998, 1997 and 1996, respectively.
Management believes that the methods used in allocating these costs are
reasonable and that such charges approximate the fair value of the space and
services provided which would have been incurred on a stand alone basis.

         During 1998 and 1997, Vaxcel contracted with the above-mentioned
subsidiary of CytRx, which was divested by CytRx in February 1998, for certain
analytical services. Amounts expensed in 1998 and 1997 pursuant to these
contracts were $11,000 and $164,000, respectively.

CONVERTIBLE NOTES
         In March 1998, Vaxcel borrowed $100,000 from CytRx pursuant to a
convertible note agreement (the "March 1998 Note"). The March 1998 Note bears
interest at 9% per annum and was due and payable on December 31, 1998. On
December 31, 1998, CytRx granted Vaxcel an extension of the due date until March
31, 1999. The March 1998 Note is convertible into shares of Vaxcel common stock
at the lower of (a) $.3125 per share, or (b) the average closing bid price of
Vaxcel's common stock for the 5 days preceding conversion. Such beneficial
conversion feature was determined to have a fair value of $60,000 at the date of
issuance and was recorded as interest expense at the date of issuance since the
March 1998 Note was immediately convertible.

         In December 1998, Vaxcel borrowed $56,000 from CytRx pursuant to a
convertible note agreement (the "December 1998 Note"). The December 1998 Note
bears interest at 9% per annum and is due and payable on March 31, 1999. The
December 1998 Note is convertible into shares of Vaxcel common stock at the
lower of (a) $.0625 per share, or (b) the average closing bid price of Vaxcel's
common stock for the 5 days preceding conversion. The December 1998 Note is
collateralized by any proceeds received in connection with a certain technology
license agreement.

         In January 1999, Vaxcel borrowed $25,000 from CytRx pursuant to a
convertible note agreement (the "January 1999 Note"). The January 1999 Note
bears interest at 9% per annum and was due and payable on March 31, 1999. The
January 1999 Note was repaid by Vaxcel in February 1999.

         Interest paid by Vaxcel to CytRx pursuant to the March 1998 Note and
the December 1998 Note totaled $6,786 during 1998.




                                                                              19
<PAGE>   20



REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Vaxcel, Inc.

We have audited the accompanying balance sheets of Vaxcel, Inc. as of December
31, 1998 and 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes, examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vaxcel, Inc. at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and accumulated deficit raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 1. The 1998 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Atlanta, Georgia
March 9, 1999




                                                                              20
<PAGE>   21

ITEM 9   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None.
          

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth, for all current members of the Board of
Directors and management, the names and ages of such persons, the year in which
each such person was first elected a director, all positions and offices with
the Company held by each such person, the business experience during at least
the last five years of each such person, and any other directorships held by
such person in companies that are subject to the reporting requirements of the
Securities Exchange Act of 1934 or any company registered as an investment
company under the Investment Company Act of 1940. None of the following persons
serves as a director pursuant to any arrangement or understanding between him
and any other person.

           DIRECTOR POSITIONS WITH THE COMPANY, PRINCIPAL OCCUPATIONS

<TABLE>
<CAPTION>
NAME AND AGE                   SINCE   DURING AT LEAST THE PAST FIVE YEARS, AND OTHER DIRECTORSHIPS
------------                   -----   ------------------------------------------------------------
<S>                            <C>     <C> 
Jack L. Bowman (66)             1993   From 1987 until his retirement at the end of 1993, Mr. Bowman was Company Group
Director                               Chairman at Johnson & Johnson Company. From 1991 to 1993, Mr. Bowman was 
                                       responsible for Johnson & Johnson Company's diagnostic, blood glucose monitoring,
                                       and certain over-the-counter pharmaceutical businesses. Prior to that assignment
                                       at Johnson & Johnson, he was responsible for a major portion of Johnson & Johnson's
                                       global pharmaceutical businesses. From 1983 to 1987, he was Executive Vice President
                                       of American Cyanamid Company where he was responsible for the pharmaceutical, medical
                                       device and over the counter and toiletry businesses. Mr. Bowman has also served as
                                       President, Lederle Laboratories Division and Executive Vice President, CIBA-GEIGY
                                       Pharmaceutical Division. Mr. Bowman also serves as a director of NeoRx Corporation,
                                       Targeted Genetics, Inc., Cell Therapeutics, Inc., Cellergy Pharmaceuticals, Inc.,
                                       Osiris Therapeutics, Inc. and CytRx Corporation.

Lyle A. Honhke (56)             1997   Dr. Hohnke served as a director of Zynaxis, Inc. from April 1996 until its merger
Director                               with Vaxcel in May 1997, at which time he was elected to the Vaxcel Board of
                                       Directors. Since 1994, Dr. Hohnke has served as a member of Javelin Capital Fund,
                                       LLC, a general partner of Javelin Ventures, LP, a company engaged in venture
                                       capital investments. From 1991 to 1994 Dr.Hohnke was General Partner for Heart Land 
                                       Seed Capital Fund. Dr. Hohnke also serves as a director of Diamond Animal Health,
                                       Inc., Southern BioSystems, Inc., Guidestar Health Systems, Inc. and CytRx Corporation.

Jack J. Luchese (50)            1993   Mr. Luchese has served as President and Chief Executive Officer of CytRx Corporation since
Director                               March 1989. Prior to joining CytRx, Mr. Luchese served as Vice President and General Manager
                                       of the Armour Pharmaceutical Corporation, and as Vice President, Corporate 
                                       Business Development and a member of the Management Committee of Rorer Group, Inc.
                                       (now Rhone-Poulenc Rorer). Prior to joining Rorer Group, Inc. , Mr. Luchese was
                                       with Johnson & Johnson Company for 15 years where he held various positions in
                                       business development, licensing, sales, new product marketing, and finance. Mr.
                                       Luchese serves as a director of CytRx Corporation.
</TABLE>



                                                                             21
<PAGE>   22



<TABLE>
<S>                             <C>    <C>
Herbert H. McDade, Jr. (72)     1996   From 1989 to 1996, Mr. McDade has served as Chairman, President and Chief
Director                               Executive Officer of Chemex Pharmaceuticals, Inc., becoming Chairman of
                                       Access Pharmaceutical Co. (the successor corporation to Chemex) in January,
                                       1996. From 1986 to 1989 he was Chairman and President of Armour Pharmaceutical
                                       Corporation, a wholly-owned subsidiary of Rorer Group, Inc. (now Rhone-Poulenc
                                       Rorer). Prior to 1986, Mr. McDade served as Vice President of the Revlon
                                       Corporation. Mr. McDade serves as a director of CytRx Corporation.

Mark J. Newman, Ph.D. (43)      1998   Dr. Newman has been the President and Chief Executive Officer of Vaxcel since
Director                               August 1998. Dr. Newman is employed (since March 1999) by Epimmune, Inc. as
President & Chief                      Vice President, Infectious Disease Program. Dr. Newman served as Vice
Executive Officer                      President, Research and Development of Vaxcel, Inc. from January 1995 to August
                                       1995. Prior to joining Vaxcel, Dr. Newman was Associate Vice President, Research and
                                       Development, for Apollon, Inc. during 1994 where he was responsible for
                                       developing DNA-based vaccines. Prior to that, he was Director, Immunology
                                       and Virology Section and Senior Director, Clinical Research, at the
                                       Biopharmaceuticals Division of Cambridge Biotech Corporation (now called
                                       Aquila Biopharm) from 1989 to 1993. At Cambridge, he was heavily involved
                                       with the development and clinical testing of the QS21 saponin adjuvant for
                                       use with subunit vaccines.

Mark W. Reynolds (37)           N/A    Mr. Reynolds joined CytRx Corporation in 1988 as Controller, becoming Chief
Chief Financial Officer and            Financial Officer and Corporate Secretary in 1996. He has served concurrently
Secretary                              in these capacities with Vaxcel since its inception. Prior to joining CytRx,
                                       Mr. Reynolds was employed as a certified public accountant with Arthur
                                       Andersen LLP in Atlanta, Georgia.
</TABLE>


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's common stock, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of common
stock and other equity securities of the registrant. Directors, executive
officers and greater than ten percent stockholders are required by Securities
and Exchange Commission regulation to furnish the registrant with copies of all
Section 16(a) reports they file. To the Company's knowledge, based solely on
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the year ended
December 31, 1998 all Section 16(a) filing requirements applicable to
directors, executive officers and greater than ten percent beneficial owners
were complied with by such persons.

ITEM 11.  EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

         Directors who are employees of Vaxcel ("Employee Directors") or of
CytRx ("Affiliate Employee Directors") do not currently receive any
compensation for their services as members of the Board of Directors of Vaxcel.
Non-employee Directors who do not serve on the CytRx Board ("Outside
Directors") receive $1,500 for each Board meeting attended. Non-employee
Directors who also serve on the CytRx Board ("Affiliate Directors") receive a
fee of $3,000 for each two-day Board meeting attended ($2,000 for single-day
meetings and $750 for meetings attended by teleconference). For those meetings
held in conjunction with a CytRx meeting, the fees paid to Affiliate Directors
are allocated proportionately between CytRx and Vaxcel. Outside Directors and
Affiliate Directors receive $500 for each Committee meeting attended and an
additional $250 for functioning as Chairman of a Committee meeting.

         All Directors, except Employee Directors, each receive an option to
purchase 5,000 shares of Vaxcel Common Stock upon joining the Board, and 2,500
stock options each year thereafter upon their re-election to the Board. Stock
option grants to directors contain the same terms and provisions as stock
option grants to employees, except that options granted to directors are
considered Non-Qualified Stock Options for income tax reporting purposes.

SUMMARY COMPENSATION TABLE

         The following table presents certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during the fiscal years ended December 31,



                                                                             22
<PAGE>   23


1996, 1997 and 1998 for (i) the President and Chief Executive Officer of the
Company; and (ii) each of the four other most highly compensated executive
officers of the Company whose total salary and bonus exceeded $100,000
(determined as of December 31, 1998 and collectively, the "Named Executive
Officers").


<TABLE>
<CAPTION>
                                                                       Long-Term
                                                                      Compensation
                                                                       Securities
                                            Annual Compensation        Underlying          All Other
Name and Principal Position     Year        Salary($)   Bonus($)       Options(#)       Compensation($)
-----------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>             <C>               <C>   
Mark J. Newman                  1998       $140,000   $        -             500,000           $5,000 (1)
     President & Chief          1997        129,500       13,000                   -            4,750 (1)
     Executive Officer          1996        122,500       22,000              40,000            4,750 (1)

Mark W. Reynolds (3)            1998       $101,000      $25,000                   -           $5,000 (2)
     Chief Financial Officer    1997         94,000       12,500                   -            4,750 (2)
     and Secretary              1996         82,333       25,000                   -            4,750 (2)

Paul J. Wilson                  1998       $207,750            -                   -           $4,815 (1)
     Former President           1997        214,000            -                   -            4,750 (1)
     and CEO                    1996        205,250            -                   -            4,750 (1)
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1)      Vaxcel's matching contribution to CytRx's 401(k) Plan. Vaxcel does not
         have a 401(k) Plan, but employees of Vaxcel are eligible to
         participate in CytRx's 401(k) Plan.

(2)      CytRx's matching contribution to its 401(k) Plan.

(3)      Mr. Reynolds is an employee of CytRx; the amounts shown in the table
         above represent total compensation paid to Mr. Reynolds by CytRx for
         services rendered in all capacities for CytRx and its subsidiaries.
         Pursuant to a services and facilities agreement between Vaxcel and
         CytRx, Vaxcel pays to CytRx a fee for the services rendered by Mr.
         Reynolds as well as for other financial and administrative services.
         The total fee charged by CytRx to the Company for all services and
         facilities pursuant to this Agreement, including the services of Mr.
         Reynolds, for the year ended December 31, 1998 was approximately
         $60,000.

OPTION GRANTS IN LAST FISCAL YEAR

The following table summarizes the stock options and warrants granted during
the fiscal year ended December 31, 1998 to each of the Company's executive
officers named in the Summary Compensation Table above.

<TABLE>
<CAPTION>
                                                                                   Potential Realized Value
                                                                                   at Assumed Annual Rates
                        Number of       % of Total                                     of Stock Price
                        Securities       Options         Exercise                      Appreciation   
                        Underlying      Granted to       or Base                    for Option Term($)
                         Options        Employees         Price      Expiration   ---------------------------
  Name                 Granted (#)    in Fiscal Year    ($/Share)       Date          5%            10%
--------------------- --------------- --------------- ------------ -------------- ------------ --------------
<S>                   <C>             <C>             <C>          <C>            <C>          <C>
Mark J. Newman           500,000 (1)      100%             $.625      2/23/08      $196,530       $498,045
</TABLE>

(1) These options vest as to 350,000 upon the sale or merger of the Company and
as to 150,000 upon the six-month anniversary of the executive's employment
after such sale or merger.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUE AT DECEMBER 
31, 1997

         The following table sets forth the number and total value of
unexercised in-the-money options at December 31, 1998 for each of the executive
officers of the Company named in the Summary Compensation Table above, using
the price per share of the Common Stock of $.0625 on December 31, 1998. No stock
options were exercised during 1997 by any of the Company's Named Executive
Officers.



                                                                             23
<PAGE>   24

<TABLE>
<CAPTION>
                                       Number of Securities Underlying         Value of Unexercised
                                             Unexercised Options               In-the-Money Options
                                           at December 31, 1998(#)            at December 31, 1998($)
                                       --------------------------------    ------------------------------
                                        Exercisable     Unexercisable      Exercisable      Unexercisable
                                       -------------    ---------------    -----------      -------------
<S>                                    <C>              <C>                <C>              <C>      
Mark J. Newman                            110,000          605,000         $       -         $       -
Paul J. Wilson                            285,000                -                 -                 -
</TABLE>


EMPLOYMENT AGREEMENTS

         Mr. Paul J. Wilson's employment agreement expired effective August 16,
1998 and was not renewed. Since that date, Dr. Mark J. Newman has served in the
capacity of President and Chief Executive Officer. The annual cash compensation
for Dr. Newman was $140,000 during 1998 and increased to $145,000 on January 1,
1999. Effective February 28, 1999, Dr. Newman left the Company to pursue other
interests, but has remained as President and Chief Executive Officer in a
part-time status for no cash compensation.

         During the term of his employment, Dr. Newman received options to
purchase up to an aggregate of 715,000 shares of Vaxcel Common Stock. Options as
to 215,000 shares have an exercise price of $1.50 per share and vest upon the
achievement of certain corporate milestones. Options as to 500,000 shares have
an exercise price of $.625 per share and vest primarily upon events surrounding
the sale or merger of the Company. As of April 22, 1999, Dr. Newman has vested
with respect to options to purchase 110,000 shares. The Company has also
guaranteed to Dr. Newman that, as a result of the successful sale or merger of
the Company to a third party, Dr. Newman will receive a combination of stock
options and a performance bonus having a gross value equal to at least $100,000.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         The following report shall not be deemed incorporated by reference
into any filing under the Securities Act of 1933 (the "1933 Act") or under the
Securities an Exchange Act of 1934 (the "1934 Act"), except to the extent that
the Company specifically incorporates this information by reference, and shall
not otherwise be deemed filed under either the 1933 Act or the 1934 Act.

         The Compensation Committee of the Board of Directors (the "Committee")
establishes the general compensation practices of the Company, establishes the
compensation plans and specific compensation levels for executive officers and
administers the Company's stock option plans.

         The Committee believes that the Chief Executive Officer's compensation
should be influenced by Company performance, although "performance" for a
company engaged in pharmaceutical research and development does not necessarily
correlate to profits. The Committee considers "performance" to include
achievement of product development targets and milestones, effective
fund-raising and technology licensing efforts, and effective management of
personnel and capital resources, among other criteria. The Committee also
reviews the Chief Executive Officer's compensation in light of the level of
similar executive compensation arrangements within the biopharmaceutical
industry. In determining the cash compensation and stock options granted to Dr.
Newman during 1998 , the Committee's primary intention was to provide Dr.
Newman with the proper incentives to remain with the Company until such time as
a sale or merger of the Company could be consummated.

         The Committee has adopted similar practices with respect to
compensation of other executive officers of the Company. In establishing base
salaries and cash bonuses for executive officers, the Committee considers
relative company performance, the individual's past performance and future
potential, and compensation for persons holding similarly responsible positions
at other companies in the pharmaceutical and biotechnology industries. The
relative importance of these factors varies depending



                                                                              24
<PAGE>   25



upon the individual's responsibilities; all facts are considered in
establishing both base salaries and cash bonuses. When making comparison to
other companies, the Committee generally considers those companies included in
the Nasdaq Pharmaceutical Index (see "Company Performance").

         For 1998, the Committee considered Section 162(m), which limits tax
deductions of public companies on compensation to certain executive officers in
excess of $1 million dollars, along with other factors in determining executive
compensation. The committee will continue to consider the effect of Section 162
(m) on its compensation decisions, but has no formal policy to structure
executive compensation so that it complies with the requirements of Section
162(m).

                             Respectfully submitted,

                             Compensation Committee:
                                 Jack L. Bowman
                                 Jack J. Luchese
                                 Herbert H. McDade

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. There are no
"interlocks," as defined by the Securities and Exchange Commission, with respect
to any member of the Compensation Committee. For 1998, the Compensation
Committee was comprised of Jack J. Luchese, Jack L. Bowman and Hubert H. 
McDade, Jr.

STOCKHOLDER RETURN COMPARISON

         The following line graph presentation compares cumulative total
stockholder returns of the Company with the Nasdaq Stock Market Index and the
Nasdaq Pharmaceutical Index (the "Peer Index") for the period from June 30,
1997 to December 31, 1998. The Company's Common Stock first began trading
during June 1997. The graph and table assume that $100 was invested in each of
the Company's Common Stock, the Nasdaq Stock Market Index and the Peer Index on
June 30, 1997, and that all dividends were reinvested. This data was furnished
by the Center for Research in Security Prices, The University of Chicago.

COMPARISON OF CUMULATIVE TOTAL RETURNS

                                    [GRAPH]



                                                                             25
<PAGE>   26



<TABLE>
<CAPTION>
                              -----------------------------------------------
                                  JUNE 30,     DECEMBER 31,      DECEMBER 31,
                                    1997          1997               1998
-----------------------------------------------------------------------------
<S>                              <C>           <C>               <C>
VAXCEL, INC.                         100               36                 4
-----------------------------------------------------------------------------
THE NASDAQ STOCK MARKET              100              110               154
-----------------------------------------------------------------------------
PEER INDEX                           100              101               129
-----------------------------------------------------------------------------
</TABLE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Based solely upon information made available to the Company, the
following table sets forth certain information with respect to the beneficial
ownership of Common Stock as of April 22, 1999 by (i) each person who is known
by the Company to beneficially own more than five percent of the Common Stock;
(ii) each director and nominee for director of the Company; (iii) each of the
Named Executive Officers (as defined under "Executive Compensation"); and (iv)
all officers and directors as a group. Except as otherwise indicated, the
holders listed below have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.

<TABLE>
<CAPTION>
                                                                              SHARES OF COMMON STOCK
                                                                         ----------------------------------
   NAME AND ADDRESS OF BENEFICIAL OWNER                                     NUMBER          PERCENTAGE (1)
   ------------------------------------                                  -------------     ----------------
   <S>                                                                   <C>               <C>
   NAMED EXECUTIVE OFFICERS AND DIRECTORS (2):
      Jack L. Bowman (3)                                                      12,332             *
      Lyle A. Hohnke (4)                                                      49,849             *
      Jack J. Luchese (5)                                                      4,999             *
      Herbert H. McDade, Jr. (6)                                              12,332             *
      Mark J. Newman (7)                                                     110,000             1.0%
      Mark W. Reynolds                                                         1,200             *
      Paul J. Wilson                                                           2,280             *
        All executive officers and directors as a group (6 persons) (8)      190,712             1.7%
   OTHER 5% STOCKHOLDERS:
      CytRx Corporation                                                    9,265,000            87.5%
      154 Technology Parkway
      Norcross, Georgia  30092
</TABLE>

----------------------------------
*      Less than 1%.

(1)    Based on 10,994,656 shares of Common Stock outstanding on April 22,
       1999.
(2)    The business address of all such persons is: c/o Vaxcel, Inc., 154
       Technology Parkway, Norcross, Georgia 30092.
(3)    Includes options to purchase 12,332 shares of Common Stock exercisable
       within 60 days.
(4)    Includes options to purchase 2,499 shares of Common Stock exercisable
       within 60 days. Also includes 47,350 shares held by Javelin Capital
       Fund L.P. ("Javelin"). Dr. Hohnke is a member of Javelin Venture
       Partners, LLC, a general partner of Javelin and may be deemed to
       share voting and investment power with respect to such shares and
       warrants. Dr. Hohnke has disclaimed beneficial ownership of such
       shares.
(5)    Includes options to purchase 4,999 shares of Common Stock exercisable
       within 60 days.
(6)    Includes options to purchase 12,332 shares of Common Stock exercisable
       within 60 days.
(7)    Includes options to purchase 110,000 shares of Common Stock
       exercisable within 60 days.
(8)    Includes options to purchase 142,162 shares of Common Stock
       exercisable within 60 days.



                                                                             26
<PAGE>   27




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

License Agreement
         Vaxcel derives its rights to develop and commercialize Optivax from a
license agreement with CytRx effective January 1993, as amended (the "Optivax
Agreement"), which grants to Vaxcel the exclusive, worldwide right to develop
and sell certain copolymers covered by claims of certain United States and
foreign patent rights of CytRx, for use to enhance immune response in humans, in
combination with an antigen in a vaccine delivery system (the "Optivax Field").
Expressly excluded from the Optivax Field are use of the copolymers alone as
non-specific immune stimulants and use of the copolymers as therapeutic agents
for infectious diseases. Under the terms of the Optivax Agreement, Vaxcel is
required to pay CytRx a 10% royalty on net sales by Vaxcel or its affiliates of
vaccines directly commercialized by Vaxcel in the Optivax Field for the longer
of ten years from the first commercial sale of the product or the life of any
patent right covering the licensed product. The Optivax Agreement gives Vaxcel
the right to sublicense its rights, subject to certain conditions and the
payment to CytRx of 15% of the sublicense compensation received by Vaxcel.
Royalties paid to CytRx pursuant to the Optivax Agreement amounted to $7,500
during 1996. No royalties were paid pursuant to this agreement during 1997 or
1998.

Supply Agreement
         The Optivax Agreement gives Vaxcel the right to make finished vaccines
but does not provide the right to make the bulk copolymers, which are supplied
by CytRx under a supply agreement entered into between Vaxcel and CytRx
effective January 1993 and amended as of October 10, 1997 (the "Supply
Agreement"). Under the terms of the Supply Agreement, CytRx is to provide the
Optivax CRL-1005 copolymer at prices per kilogram which have been predetermined
in the Supply Agreement. If Vaxcel requests CytRx to synthesize and supply a
copolymer different than the Optivax CRL1005 copolymer, CytRx will offer to
supply such copolymers to Vaxcel upon terms similar to the Optivax CRL1005
copolymer if such copolymer is similar in structure and requires similar
manufacturing procedures with similar cost. In the event the cost of CytRx
supplying such copolymers to Vaxcel is not similar to the Optivax CRL1005
copolymer or involves other manufacturing processes, the parties will negotiate
revised prices per kilogram and all other terms of the Supply Agreement will
remain unchanged. Vaxcel's requirements of the copolymers are to be provided
either directly by CytRx or through a third-party supplier selected by CytRx. If
CytRx or its licensed third-party chemical manufacturer is unwilling or unable
to supply the copolymers, then Vaxcel and/or its sublicensees shall have the
right to make or have made the copolymers and CytRx will make appropriate
manufacturing know-how available to Vaxcel or its designee. The Supply Agreement
is subject to termination by CytRx upon a termination event under the Optivax
Agreement and in other customary circumstances (such as a breach by Vaxcel).
Amounts paid to CytRx for production of copolymers were $5,000, $79,591 and
$10,923 during 1998, 1997 and 1996, respectively.

Services and Facilities Agreements
         Effective June 1, 1993 and amended October 10, 1996, Vaxcel and CytRx
entered into a services and facilities use agreement pursuant to which CytRx
agreed to provide Vaxcel with certain management, administrative, and scientific
services, as well as the use of certain administrative space at the CytRx
facility in Norcross, Georgia. Amounts paid to CytRx pursuant to this agreement
were $90,000, $90,000 and $69,963 during 1998, 1997 and 1996, respectively.
Effective January 1, 1996 and amended October 16, 1996, Vaxcel and Proceutics,
Inc. ("Proceutics"), a then wholly-owned subsidiary of CytRx, entered into a
facilities use agreement whereby Proceutics reserved and made available to
Vaxcel certain laboratory, vivarium and related space at the Proceutics facility
in Norcross, Georgia. Amounts paid to Proceutics pursuant to this agreement were
$6,037, $48,300 and $51,000 during 1998, 1997 and 1996, respectively.

         During 1998 and 1997, Vaxcel contracted with Proceutics for certain
analytical laboratory services. Amounts paid to Proceutics in 1998 and 1997
pursuant to these contracts were $11,223 and $163,915, respectively.




                                                                              27
<PAGE>   28



Convertible Notes
         Effective March 15, 1997, in order to provide necessary funding for
certain expenses and operations of Vaxcel pending the Merger, CytRx and Vaxcel
entered into a Loan Agreement (the "1997 Loan"), pursuant to which CytRx agreed
to lend up to $400,000 to Vaxcel. The purpose of the 1997 Loan was to provide
funding to Vaxcel for certain expenses directly or indirectly related to the
Merger incurred by either CytRx or Vaxcel and for ongoing operational cash needs
prior to the Merger. The 1997 Loan was unsecured and was interest-free until May
1, 1997; thereafter the interest rate was prime plus 2%. The outstanding 1997
Loan balance of $286,067, together with accrued interest of $1,421 was repaid by
Vaxcel upon the closing of its merger with Zynaxis on May 21, 1997.

         In March 1998, Vaxcel borrowed $100,000 from CytRx pursuant to a
convertible note agreement (the "March 1998 Note"). The March 1998 Note bears
interest at 9% per annum and was due and payable on December 31, 1998. On
December 31, 1998, CytRx granted Vaxcel an extension of the due date until March
31, 1999. The March 1998 Note is convertible into shares of Vaxcel common stock
at the lower of (a) $.3125 per share, or (b) the average closing bid price of
Vaxcel's common stock for the 5 days preceding conversion. The March 1998 Note 
was repaid by Vaxcel in April 1999.

         In December 1998, Vaxcel borrowed $56,000 from CytRx pursuant to a
convertible note agreement (the "December 1998 Note"). The December 1998 Note
bears interest at 9% per annum and is due and payable on March 31, 1999. The
December 1998 Note is convertible into shares of Vaxcel common stock at the
lower of (a) $.0625 per share, or (b) the average closing bid price of Vaxcel's
common stock for the 5 days preceding conversion. The December 1998 Note 
was repaid by Vaxcel in April 1999.

         In January 1999, Vaxcel borrowed $25,000 from CytRx pursuant to a
convertible note agreement (the "January 1999 Note"). The January 1999 Note bore
interest at a rate of 9% per annum and was due and payable on March 31, 1999.
The January 1999 Note was repaid by Vaxcel in February 1999.


                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this 10-K:

     1.  Financial Statements

         Balance Sheets as of December 31, 1998 and 1997

         Statements of Operations for the Years Ended December 31, 1998, 1997
         and 1996

         Statements of Stockholders' Equity for the Years Ended December 31,
         1996, 1997 and 1998

         Statements of Cash Flows for the Years Ended December 31, 1998, 1997
         and 1996

         Notes to Financial Statements

         Report of Independent Auditors

     2.  Financial Statement Schedules:

         Schedule II - Valuation and Qualifying Accounts for the years ended
         December 31, 1998, 1997 and 1996

         All other schedules are omitted because they are not required, not
applicable, or the information is provided in the financial statements or notes
thereto.

     3.  Exhibits required by Item 601 of Regulation S-K:

         See Exhibit Index on page 29 of this Form 10-K.

(b)  Reports on Form 8-K:

     None



                                                                              28



                                                                             
<PAGE>   29



                                  Vaxcel, Inc.
                             Form 10-K Exhibit Index

<TABLE>
<CAPTION>
Exhibit
Number
-------
<S>        <C>                                                                                   <C>
2.1        Agreement and Plan of Merger and Contribution dated as of December 6, 1996,
           by and among CytRx Corporation, Vaxcel, Inc., Vaxcel Merger Subsidiary, Inc.
           and Zynaxis, Inc.                                                                     (a)
3.1        Certificate of Incorporation                                                          (a)
3.2        By-Laws                                                                               (a)
10.1       Amended and Restated License Agreement dated October 10, 1996
           by and between Vaxcel, Inc. and CytRx Corporation                                     (a)
10.2       Amended and Restated Supply Agreement dated October 10, 1996
           by and between Vaxcel, Inc. and CytRx Corporation                                     (a)
10.3       Services and Facilities Use Agreement dated October 10, 1996 by and
           between Vaxcel, Inc. and CytRx Corporation                                            (a)
10.4*      Vaxcel, Inc. 1993 Stock Option Plan                                                   (a)
10.5       Convertible Note dated March 30, 1998 by and between Vaxcel, Inc.                        
           and CytRx Corporation                                                                 (b)
10.6       Convertible Note dated December 18, 1998 by and between Vaxcel, Inc.                
           and CytRx Corporation                                                                 (b)
10.7       Convertible Note dated January 7, 1999 by and between Vaxcel, Inc.                   
           and CytRx Corporation                                                                 (b)
10.8       Option Agreement dated January 27, 1999 by and between Vaxcel, Inc.
           and Innovax Corporation                                                               (b)
27.1       Financial Data Schedule (for SEC use only)                                            (b)
</TABLE>


*Indicates a management contract or compensatory plan or arrangement.

----------
(a)      Incorporated by reference to the Company's Registration Statement on
         Form S-4 (File No. 333-19125) filed on March 26, 1997.

(b)      Incorporated by reference to the Company's Annual Report on Form 10-K
         filed on March 31, 1999.
                                                                              29
<PAGE>   30



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                             VAXCEL, INC.

                                             By: /s/ Mark J. Newman
                                                -------------------------------
                                             Mark J. Newman, President
Date: April 23, 1999                         and Chief Executive Officer
                                             (Principal Executive Officer)

                                                                              30
<PAGE>   31




                                  VAXCEL, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                     Additions
                                                             --------------------------
                                               Balance at     Charged to     Charged to                     Balance at
                                                Beginning     Costs and         Other                           End
                Description                     of Period      Expenses       Accounts       Deductions      of Period
  -------------------------------------       ------------   ------------    ----------     -----------    ------------
  <S>                                         <C>            <C>             <C>            <C>            <C>
  Reserve Deducted in the Balance Sheet                                                                     
  from the Asset to Which it Applies:                                                                       

    Allowance for Deferred Tax Assets                                                                       
     Year ended December 31, 1998             $  3,250,000   $          -    $ 2,296,000    $        --    $  5,546,000
     Year ended December 31, 1997                1,776,000              -      1,474,000             --       3,250,000
     Year ended December 31, 1996                1,300,000              -        476,000             --       1,776,000
</TABLE>



                                                                              31